Chinese self-driving companies face a dilemma

Image source: Visual China

Self-driving companies have become a new technology game point for China and the United States.

Once considered by the industry to be one of the most important application scenarios of artificial intelligence after image recognition, the combination of new energy and autonomous driving is considered to be the future of the huge industry of automobiles.

At the same time, data security requirements between major powers are becoming more stringent. Here's why: Self-driving companies have vast tracts of road data that is critical to national security. As a new round of strategic technology companies, China's artificial intelligence technology, including autonomous driving, has also become the target of a new round of suppression and containment in the United States.

The recent investigation of the future of self-driving companies Tucson is worth studying, from which we can glimpse the dilemma behind the self-driving companies in China and the United States.

Founded in 2015 by several Chinese, Tucson Future has self-driving truck businesses in both China and the United States. In January 2016, it received a Series A investment of RMB 50 million from Sina, resulting in two future director seats in Tucson.

Tucson's future valuation has since soared and eventually landed on nasdaq last April, where it is now worth about $3.7 billion. Tucson Future is headquartered in San Diego, California, usa, and has a small presence in China. After its IPO, the U.S. government launched a formal investigation into the company, focusing on its China business, as well as the relationship between shareholders.

As a result of the final investigation, two board members from Sina will leave after this year; and Tucson agreed to restrict access to certain data and adopt a technology control program. Jim Mullen, Tucson Future Chief Administrative Officer and Legal Officer, said the measures include restricting access to some information from the company's China division, including source code and algorithms for its self-driving truck business. In addition, Tucson will set up a new security officer, who will establish a "security committee" that will have to report regularly to the Committee on Foreign Investment.

It should be said that the results of the treatment of Tucson are basically acceptable, after all, after the investigation, Tucson can continue to conduct business and find a solution path.

But note, however, that Tucson's future experience will not be an isolated case in the autonomous driving and artificial intelligence industries. In the future, there are three types of autonomous driving companies that will be affected by US regulation: first, autonomous driving companies with Chinese equity participation; second, autonomous driving companies with R&D institutions in China; and third, autonomous driving companies facing the Chinese market.

On the flip side of the mirror, China is also ramping up scrutiny of local self-driving companies.

A big background is that last year, China's cumulative investment in the smart car market reached 159.19 billion yuan, of which more than 10 large financings of more than 300 million US dollars, including complete vehicles, autonomous driving solutions, chips, lidar and so on.

Many autonomous driving companies have ushered in their own highlight moments. At one point, the valuation of Xiaoma Zhixing was as high as $12 billion, and the valuation of many companies such as Momenta also reached the unicorn level.

Please also note that these companies use a VIE architecture. It was originally designed with the goal of going public in the United States, because American investors are more receptive to the new economy and have better liquidity. Perhaps for the sake of R&D, and for the multiple purposes of giving U.S. investors a better understanding of the company, some Chinese companies have located their R&D centers in the United States. For example, Baidu Apollo established an AI autonomous driving research and development center in Sunnyvale, California, as early as 2018, and tested L4 autonomous driving locally; Xiaoma Zhixing also placed its headquarters and research and development center in Silicon Valley, and launched a self-driving taxi service in California in 2019.

But after last July, Chinese tech companies have faced challenges in going public in the U.S. — and they will all face stricter data scrutiny. The State Internet Information Office issued a notice on the "Measures for The Review of Network Security (Draft Revision for Solicitation of Comments)" for public comment. The Measures propose that operators with more than 1 million users' personal information must apply for network security review to the Cyber Security Review Office if they go public abroad.

This means that almost all self-driving companies planning to go public in the United States will be subject to cybersecurity reviews.

And, even if Chinese self-driving companies can go public in the United States, it can be seen from Tucson's case that Chinese self-driving companies may also be subject to stricter scrutiny in the United States.

Amid growing international geopolitical tensions, U.S. policy regulation and crackdown could send Chinese companies strategically to the domestic market. This means that companies with VIE structures and foreign-funded structures overseas need to make strategic adjustments, while it is not easy to dismantle the VIE structure and adjust the equity structure, and it is even difficult for some companies to complete.

Statistics say that 70% of the 10 leading companies in China's autonomous driving industry are currently foreign-funded structures, and these companies may face Tucson-like supervision, withdrawing from teams and research and development centers in China, and even no longer taking the Chinese market as a strategic focus. In contrast, the few Purely Domestic-owned Chinese autonomous driving companies have demonstrated unique advantages, at least their road to domestic listing will be much smoother.

What kind of capital arrangements should be made for foreign-funded autonomous driving companies? This is perhaps the most serious problem before them now. (Fortune Chinese Network)

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